FocusM&A outlook bright for adhesives and sealants sector

21 March 2013 21:15[Source: ICIS news]

By Joseph Chang

NEW YORK (ICIS)--Hopes are high for the chemical mergers and acquisitions (M&A) market overall and the adhesives and sealants sector in particular.

“The outlook for M&A in this sector remains positive but rather focused as companies buy select assets with the technologies that fit their business,” said John Televantos, partner at US-based private equity firm Arsenal Capital Partners and co-head of its specialty industrials group.

“It is a very fragmented market with many companies with less than $50m (€39m) in annual revenue.”

These owners typically decide for their own personal reasons on when to sell, and sales of these assets will continue, he noted.

“Companies with adhesives and sealants platforms such as Arsenal will look for these kinds of deals. We expect to close one or two more of these deals in 2013,” Televantos said.

“The time for consolidation is now. Being bigger has never been as important with the benefits of scale in technology, raw material purchasing and distribution channels, as well as the growing costs of global regulatory compliance,” said John Beagle, co-founder and head of the chemical practice of US-based investment bank Grace Matthews

Acquisitions by large companies will continue to be very focused as they seek to fill niches in technologies or geographies, he added.

The banker is “very optimistic” on the outlook for M&A activity in the adhesives and sealants sector for 2013.

“The balance sheets of the big adhesives companies are incredibly strong. They are also publicly traded companies that are under pressure to grow,” said Beagle.

“They are printing money now and have high cash and low debt levels. They will put the cash to use with dividends and acquisitions,” he added.

And acquisitions of formulated chemical producers such as those in adhesives tend to be low risk, he noted.

“For almost every small to mid-sized deal, you have plenty of cost savings opportunities, ranging from plant closures, raw material purchasing to management duplication. There is an incredible safety net for a deal,” Beagle said.

An attractive adhesives acquisition candidate will tend to be end market focused with technology advantages.

Right now, valuations are robust for quality adhesives and sealants assets, making for a seller’s market, said the banker.

“There is a scarcity of targets, while both strategic and financial buyers are under pressure to put money to work. In addition, almost every deal today is shopped or threatened to be shopped,” said Beagle.

“Gone are the days when a large buyer takes advantage of an uninformed seller at a low price,” he added.

The banker estimates high quality specialty adhesives assets can fetch between 8-10 times earnings before interest, tax, depreciation and amortisation (EBITDA).

Arsenal Capital Partners has been on a tear, buying up five companies in 2012.

Arsenal is building a technology centre in North Carolina and expanding its ultraviolet resin production capacity in the Americas after buying Netherlands-based IGM Resins in September 2012.

IGM Resins, with annual sales of over $150m, produces formulated materials for the coatings, adhesives and ink markets. The ultraviolet radiation-cured formulations are solvent free and release few emissions. Annually the company consumes millions of pounds of acrylic, epoxy and urethane monomers and polymers as raw materials.

Televantos aimed to develop an adhesives, sealants and coatings platform for three key reasons.

“First, it is a fragmented market, which allows us to have a roll-up play in the sector starting with a platform and building on it with new technologies,” he said.

Second, the adhesives sector in particular is still growing faster than GDP as these materials replace traditional fasteners such as screws and nails. The process of applying the materials is easier to automate and the performance and aesthetics tend to be improved, he noted.

“Lastly, these are businesses that have great customer intimacy with a service component. Here you can be less worried about foreign imports that will displace your products. They are also not very capital intensive businesses with good cash conversion,” said Televantos.

“Private equity loves the steady cash flows of formulated chemistries, including adhesives,” said Beagle. “They are fairly predictable and also the businesses have low CAPX [capital expenditure] requirements.”

Arsenal bought its platform business US-based Royal Adhesives & Sealants from fellow private equity firm Quad-C Management in November 2010. Its products included thermosetting epoxy and urethane, solvent-based, and water-based materials serving a diverse range of markets including aerospace and defence, construction, specialty packaging, automotive and industrial.

A month later in December 2010, it acquired US-based specialty adhesives, coatings and polymers firm Para-Chem in a process that actually began before the Royal Adhesives deal, Televantos explained. Since then it has added three more acquisitions to the platform.

Arsenal prefers to seek out reactive, and less solvent-based adhesives companies with a higher technology content. Ultimately, it expects to roll-up these assets into one stronger holding company and eventually sell to a strategic or another financial buyer, said Televantos.